intro to property & casualty insurance - new

8/6/2019 Intro to Property & Casualty Insurance - New

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TCS Confidential

Intro to P & C Insurance

~ An Overview~


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May 2011

Contents:-

introduction

How is insurance sold

Underwriting

Claims handling

Policy renewal & services

Types of insurance policies

Insurance rating system

benefits of insurance


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May 2011

introduction

Insurance:- A system by which a risk is transferred by a

Person, Business or Organization to an insurance company,which reimburses the insured for the covered losses andprovides for sharing the costs of losses among all insured's.

Personal Insurance:- Insurance coverage's that are purchasedby individuals and families covering non-businessexposures.

Commercial Insurance:- Insurance coverage's purchased forbusiness purposes.

Insurer: Insurer (Insurance Company), sells insurancepolicies that protect insureds against financial hardship

against financial losses.


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Insured : Is a person ,business or Organization that is covered by aninsurance policy. Insurance premium : Is a periodic payment by the insuredto the insurance company in exchange of insurance coverage.

Risk: Is the possibility of financial loss.

Peril: A cause of loss. (Ex:- fire)

Insurance policy : Is a contract that states the rights and duties of theinsurance company and the insured.


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May 2011

Common Insurance policies:-

Property insurance: Covers accidental loss resulting from the damage to the property

of the insured.

Liability insurance: Covers accidental loss resulting from injury to the body ordamage to the property for which the insured is legally responsible.

Health insurance: Provides payment for covered medical costs and disability income.

Life insurance: Pays funds to ease the financial problems that might arise fromuncertainty regarding the time of death.

Other plans:-

Social Security Program : Is a federal insurance program funded by taxes that arepaid by employees, employers and the self employed.

Private retirement plans:-

Includes employer Sponsored pension plans and individual annuities andprovide an income for people who retire. These are run by life insurance companies.


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How is insurance sold??


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May 2011

Insurance policy life cycle:-

To get the insurance coverage started.

To pay all covered claims.

To provide service during policy period.

To renew the policy when coverage expires.


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May 2011

initial stages of the sale:-

Broker

:Representatives of insurance buyers. They resemble agent except for the factthat ,in the legal sense, they represent the party seeking insurance.

Producer: The person who sells insurance policies. Also known as insuranceagent/broker/sales representative.

Qualities of a good producer:- Thorough Technical knowledge

Sound customer service skills

Good public image


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May 2011

Identifying a potential ProspectProspectis a person, business or organization to which a producer hopes to sell

insurance. After the conclusion of the sale the prospect would be termed as aninsured/account/customer/client.

Advising on the kind of insurance that should be purchased by analyzing the need ofthe prospect and identifying the Loss exposure involved.

The producer and the insurance buyers use the survey form as a check list ofpossibilities. Survey questionnaire is a form that lists large number of lossexposures often found in businesses. Loss Exposures are situations that could lead to an accidental loss.After identifying the loss exposures, the application would be filled with thehelp of the customer service repAn application, is used to gather information that will be used by the

Underwriters.(Ex:- An auto insurance app would ask for specific info on each vehicle, make,

model, year of manufacture etc.,)

Role of the Producer in providing Insurance


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Customer Service representative is a person who supports the sales efforts of theproducer. -

Risk Analysis:-Risk analysis plays an important role in premium determination.

Based on the possible risk associated with the prospect and their safety measures sofar, the risk manager/agent determines the premium to be charged.

Risk manager:- Is responsible for preserving a firms assets against accidentallosses of various kinds. They buy insurance, promote loss control measures fortheir organizations. Large firms usually have a risk management department

whereas in a small firm a person (risk manager) performs the risk managementduties.

Preparing a Quote with the help of the risk manager / Underwriter of the insurer.(Complete details of the prospect should be collected)

Quotation:- A quote/quotation is a statement regarding the premium that willbe charged for certain type of coverage.


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Before determining the premium, the agent would look for deductible if theinsured is willing to bear.

Deductible:- Is that portion of an insured loss that is not paid by the insurancecompany.

Limits/ Limits of liability:-Indicate in an application how much insurance isrequested. Once the policy is issued, the limits in the policy set the maximumdollar amount the insurance company will pay.

Coverage acceptance of the prospect:- A binder will be issued after theprospects acceptance

Binder:- Is a statement that coverage is in force until the actual policy is issued.A binder need not be in writing, it can also be a statement given over phone.

Catering to the needs of the insured during the period of coverage and duringrenewal.

Account Selling:- Is trying to handle all of a clients insurance needs, rather thanproviding for only a portion of those needs.


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Different types of marketing systems:

1. Independent agency system: An independent agent sells insurance for severalunrelated insurance companies.

2. Exclusive agency system: An Exclusive agent has a contract to sell insurance forone insurance company.

3. Direct Writing system: Insurance company that sells insurance through theiremployees.

4. Direct Response marketing system: Sales done by mail or by the phone.


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First stage of the sale (Prospect Agent)

The prospect approaches the

agent for insurance coverage

The agent collects all the basic

in formations and the information

necessary for the type of

insurance requested.

The agent with the risk manager or the risk

management team - analyses the risk

involved and the quote is prepared.

The insurance proposal(application, quote,

cover letter of the agent) is sent to the UW

for review

Binder is issued

(Say for instance -if the request is for

an auto insurance- DL #, VIN #,

prior losses,violations, vehicletype, number of

vehicles, numberof drivers etc)

Binder is atemporary

coverage untilthe actual

policy is issued

Quote is anestimate of howmuch premium

would be chargedfor a particular type

of coverage


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Underwriting


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Who is an underwriter??

An underwriter evaluates request for insurance and decide which applicants for

insurance are accepted and which are rejected.

If an applicant is accepted the underwriter also determines how much coverage theinsurer is willing to provide at what price.

Goal of an Underwriter:-

Adverse selection is the increasing likelihood that consumers will purchaseinsurance when the premium is low relative to the risk.

It is the goal of the UW to sell insurance when the risk is low relative to thepremium.


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May 2011

Steps involved in Underwriting:-

Gathering necessary information.

Analyzing the information.

Identifying the options.

Evaluating the options.

Choosing the best solution.

Acting on the decision.


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Step I:-Gathering the necessary information:-

Application: Contains information like name, address, type of coverage

requested and the amount. It would also ask for specific details like MVR (motorvehicle report ) or VIN (vehicle id number in case of Automobile insurance.Loss Control Report: Identifying the loss control measures taken by the

prospect to prevent a potential loss that might occur.Financial Report: To make sure maintenance program's do not suffer a cut back. To make sure prospects are able to pay the premium.

Step II:-Analyzing the InformationIdentifying the veracity.Using the UW guide to analyze the various types of applicants that they mightencounter.

Determining the coverage value having their UW Authority in mind.UW Authority: The limit on decision an UW can make without receivingapproval from someone at a higher level.


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May 2011

Step III:-

Identifying UW Options

Loss Control Program: Suggesting loss control measures that would reduce the risk of a

potential loss.Modifying Coverage: Providing coverage different from what was requested, usuallyrestricted coverage.

Modifying Price: Determine the price considering the market, the risk involved and thechances of future business.

Step IV:-Evaluating Options: Understanding and analyzing the various options in hand anddetermining the pros and cons of the different options.

Step V:-Choosing the best option : While choosing the best option it should be determined in

such a way that it does not affect the insurer (e.g.: better premium options with help ofDeductible's, premium financing if any)

Premium Financing: Allows the insured to pay a part the premium when coverage startsand the remainder is spread throughout the policy period.


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Step VI:-Acting on the Decision: Provide the best quote to the Prospect keeping the abovementioned criterias in mind. If required forward proposal to the superiors for approval.

Supervisor also determines the need of reinsurance.

Reinsurance: Is an agreement with another insurer with which the risk is shared. This isdone to reduce uncertainty by reducing the risk and sharing the loss.

UWs use the following to determine the premium:-

Rating manual: Is usually a book or computer programs used for calculating premium.Manual Premium:- Is the premium determined from the rating manual, not including

discounts or surcharges.

Once the decision is taken, the insurance proposal would be sent to the prospect foracceptance.

The Insurance Proposal:

Usually a booklet that highlights important features of the coverage ,related servicesand states the premium, also mentions premium financing if any.


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Factors influencing development of UW guide:

Regulation:- Includes state regulations and other Underwriting restrictions.

Price competition:-Carefully studying the competition is an important function ofthe staff UW in developing the UW guide.

Competition & need for new insurance products:- Introducing new insurance productsas per the competition & need in the current market and loss exposures involved.

Feed back from the field:- Staff UWs would make change to the UW guide as per thefeedback from producers and insured.


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May 2011

Tools for measuring Underwriting results:-

Loss Ratio:- Refers to the percent of premiums that goes to pay claims.

Losses(dollars)/premiums(dollars) = Lossratio(inpercent)

Expense Ratio:- Refers to the percent of premiums that goes to pay the insurancecompanies operating expenses.

Expenses(dollars)/premiums(dollars) = Expenseratio(inpercent)

Combined Ratio:- Is the sum of loss ratio and the expense ratio.

Lossratio + Expenseratio = Combinedratio

Underwriting Loss:- Occurs when the combined ratio is greater that 100 %

Underwriting gain:- Occurs when the combined ratio is less than 100%

If an insurance company collected $1,000,000 in home insurance premiums where$750,000 was paid for claims, $200,000 was spent for operating expenses -determine if there is an Underwriting gain or loss??


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Types of Insurance Markets:-

Voluntary Market : UWs for an insurance company voluntarily decide whether toaccept or reject an insurance application. Business accepted in this way isconsidered to be a part of Voluntary Market.

Residual Market: Applicants rejected by the Voluntary market may find insuranceavailable through one of the residual market program's.

Residual Market Programs:-Automobile insurance plans: For people who are not able to obtain autoinsurance in the voluntary market apply for coverage in the State AutomobileInsurance Plan. State assigns it to the insurance company .

FAIR Plans: Fair Access to Insurance Requirements- For property insurancewith restricted coverage and on specific conditions (loss control measures)


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Second stage of the sale UWs review

UW receives request for

proposal

UW orders necessary

records as per the

insurance requested

UW verifies all the info

disclosed by the agent

with that of the obtained

reports

UW takes

a decision

of any one of

the following

3 options:-

Accept theproposal Reject theproposal

Accept with certain

terms and

conditionsProposal is sent to

the prospect for

acceptanceInsurance would be

provided if the prospect

accepts the T &C

The prospect needs

to find insurance in

residual market

programs

If for instance if

the ins req is for

an auto-MVR,CLUE,los

s control report,

financial rpt

would be

ordered

Policy is issued

Policy is issued


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CLAIMS HANDLING


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Claims

A claim is a demand by a person or business seeking to recover for a loss.

A claim can be made against an individual.

A claim can be made against an insurance company when the insured asks forthe insurance company to pay for a loss that might be covered by an insurancepolicy.

Claimant: Is a person or business who presents a claim.

For liability insurance: The claimant is a person or business that has suffered a lossand seeks to collect for the loss from an insured. The insurance company is involvedbecause it has promised in a liability insurance policy to pay covered losses onbehalf of the insured.

For property insurance :The claimant is the insured that wants the insurancecompany to pay for repairing or replacing his or her damaged property


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Claims Adjuster: Person directly responsible for investigating andsettling the claims that might be covered by insurance.

Other names for claims adjusters are Claims Handler,Claims Representative and Claims Examiner.

The claim is assigned to a claims adjuster by a claims clerk.

Claims clerk is a person who has the job of taking claims reportsover the telephone and doing other things including

documentation that help the adjustor in the process ofadjusting claims.

Role of a claims adjuster:-

The claims adjuster investigates the fact surroundingeach claim and examines the following two thingsinitially. If the claim satisfies the following two

conditions only the adjuster proceeds to the next stage:-


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Factors influencing initial Investigation:-

Is the claim resulting from the accident covered by the insurance policy.(exclusions or restrictions)

How much will be paid according to the policy:

a. Policy limits : max amount that may be paid.b. Valuation clause: A method used to place a value on damaged property

covered by the policy

c. Deductibles:

Before proceeding to the next level, loss reserve is set up.:-

Loss reserve:- is the insurance companies best current estimate of the dollaramount that will be paid in the future for an accident that has already occurred.

Factors influencing next Investigation:-

Accident report form: Is used to record key information about the accident.

Physical evidence: Is any tangible thing that is relevant in determining the facts

concerning the accident.Oral evidence: Involves statements from people who have witnessed the

accident.

Civil authority reports(police reports) if any.


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Subrogation - When the insurer pays the insured for loss, the insurer takes over the

insureds right to collect damages from the other party responsible for the lossthrough a process called subrogation. The insurance company subrogate against theparty directly responsible for the loss. The insurance companies take away the rightof the insured to recover for any loss from the person responsible. The process ofrecovering these payments is called Subrogation.

Litigation: Is the process of carrying on a lawsuit. This is generally carried out whenthe facts surrounding the accident is not clear cut.

Out-of-court settlement: Is when people negotiate and reach agreement withouthaving a court handle the case. It saves time and money.

Drive in claim service:-

A facility for providing repair estimates on damaged cars that are still drivable.

An evaluation of the cost to repair a damaged car usually known as an estimate isgiven by a physical damage appraiser/material damage appraiser.

Different methods of claims settling:-


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Types of adjusters

Insurance company claims representative:- Claims are adjusted byfull time employees of the insurance company.

Independent adjusters:- Independent contractors who provideclaims services to various insurance companies. Independentadjusters charge insurance companies a fee for each claim thatthey handle.

Producers as adjusters:- In some cases, the producers themselvesact as draft authority.

Draft authority: A producer with draft authority is permittedto handle small claims and issue drafts (checks issued on theinsurance companys checking account) for paying certaintypes of covered claims that are within the dollar limit of thedraft authority.

Inside adjusters: Are telephone adjusters who process claims

over the phone itself when the claim is clearly covered in thepolicy.


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Replacement Cost:- Is the amount it would cost to construct the damaged buildingtoday using materials of the same kind and quality.

Acquisition Cost:- The price for which the building was originally built or purchased.Market Value:- Is the price at which it could be sold.

Actual Cash Value:- Is figured by determining what it would cost to replace theproperty and then adjusting this replacement cost by subtracting an amount that

reflects depreciation.

Depreciation:- Is loss in value that develops as items age, wear out, or becomeobsolete.

Coinsurance clause:- Is a provision in many property insurance policies that reduces the

amount that will be paid for a loss occurring when property is underinsured.A coinsurance clause sets a penalty for underinsurance when the policy limit is

substantially lower than the value of the covered property.

Factors in calculating value of a damaged

property


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Responsibilities in settling claims:-

Insured responsibility:- Has the responsibility to notify the incident ASAP to theinsurer.

Producer responsibility:- Decides whether the insurance company must be toldabout this or not base on three categories: (accident report form).

The loss is not covered.The amount of the damage is within the deductible.

The loss is (or might be covered)

Insurer responsibility:- Is to make sure that the claim is investigated

properly and settled within the timeline.


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Claim is reported tothe claims dept

Claim is assigned to aclaims adjuster

Claims adjuster checks the

following 3 things before

taking a decision

If the claim is straightforwardthe claim would be settled

immediately.

Similar services would be

provided till policy renewal

Police reportforms,

physical/oralevidences wouldbe considered

during claimsettling

Is the claim covered

Policy limits

Deductibles/valuation clause

Steps involved in claims handling:-


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2 May 2011

POLICYRENEWAL

&

SERVICES


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PolicyRenewal

Policy renewal is continuing the policy in force or another period after the expiration

of its current term.

The insured and the insurer may take any one of the following three options:-

Expiration:- An insurance policys coverage ceases, or expires, at the end of the

policy term or policy period. The expiration date is also known as the x-date.

Cancellation:- Stopping coverage during the policy period is cancellation. Insuredcan cancel the policy at any time, but the insurer can cancel the policy only at therenewal.

Unearned premium:- On a policy is the money an insurer would have to give

back if the policy were cancelled.Nonrenewal:- When an insurer decides not to renew a policy at the end of a policy

period, it is non-renewal.


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The Underwriters Perspective on policy renewal:

UWs at renewal would re evaluate the risk and all the information's that wasprovided during policy issue and take according actions.

The Producers Perspective on policy renewal:-

Agents would get the feedback from the insured regarding his experience duringthe policy term, decides any addition/deletion to the current policy is needed Willmake sure that the insured has complete confidence in his service.

The Insureds Perspective on policy renewal:-At renewal the insured takes a decision whether to continue with the insurer or

not.

Premium Auditing: Policy holders records are examined at the end of the year todetermine the audited premium.

Renewal Questionnaire:- Usually questions about changes during the past coverageperiod.

UWs gets feedback from the insured using the renewal questionnaire.


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Types of policy provisions:-

Any statement in a policy is referred to as policy provision.

There are six types of policy provisions:

1.Declaration

2.Insuring agreements

3.Exclusions

4.Conditions

5.Definitions6.Miscellaneous provisions

Declaration: Declarations personalize a printed policy and tailor it to fit a particularpolicy holder for his or her insurance needs. It also includes the information that theinsured declared on the application of the policy.

Insuring agreement: Is the insurance policy provision that states, in broad terms, thepromises made by the insurance company. An insurance policy provides coverageonly if the claim is within the scope of the promises expressed in an insuranceagreement .


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Definitions: Is the provision that explains the meaning of a word or term that is used

elsewhere in the policy.

Miscellaneous provisions: Are policy provisions that do not fit into any other policyprovisions like an endorsement.

Endorsement: Is used to amend coverage in the otherwise completed policy.

Form:- Is a standard pre-printed wording that makes up bulk of the insuranceagreement.


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TYPESOF INSURANCE

POLICIES


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Insurance

Personal Insurance

Personal Auto Policy(PAP)Homeowners Policy

Liability coverage

Medical Payments

Uninsured Motoristcoverage

Coverage Personal auto

Coverage on house

Coverage on other building/structures

Coverage on household personal ppty

Coverage on Loss of use of the dwelling building

Personal liability coverage

Coverage for medical payments to othersCollision Comprehensive

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Types of Personal Insurance policies:-


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A May 2011

Personal Auto Policy:-

Part A:- Liability coverage

The Liability coverage of the PAP covers losses due to the insureds liability forbodily injury or property damage of others caused by an auto accident.

Part B:- Medical Payments coverage:-

Medical payments coverage of the PAP covers the medical expenses of theinsured as well as to the injury of the person for which the insured is legallyresponsible, if the expenses are the result of an auto accident.


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B May 2011

Part C:- Auto Physical damage coverage:-

Is a property insurance covering disappearance/damage/destruction of the auto.Also known as Coverage for damage to your auto.

There are 2 sets of physical damage coverage:-

Collision:- Coverage applies to losses involving a collision. Collisioncoverage is available only when Other than collision coverage is also

purchased.

Other than collision:- Coverage applies to losses by perils other thancollision. Also known as comprehensive coverage.

Part D:- Uninsured motorist coverage

Coverage applies to accidents caused by a hit and run driver/ driver causing theaccident doesnt have insurance.


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C May 2011

Homeowners Policy:-

Part A:- Coverage on the dwelling building:-

This part of the homeowners policy covers the house itself.

Part B:- Coverage on other buildings or structures:-

This part of the homeowners policy covers other building structures in the insuredspremises.

Part C:- Coverage on personal property:-

This part of the homeowners policy covers all other personal property inside thehouse.


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D May 2011

Part D:- Coverage on Loss of use of the dwelling building:-This part of the homeowners policy pays the insured for additional livingexpenses during recovery of a damaged property by a covered peril.

Theft/Burglary/Robbery:- Theft is an act of stealing. Burglary is a type of theft committed by someone who breaks intosomething and illegally removes money or other property. Robbery is a type of theft committed by someone who threatens a

person and forces him or her to give money or other property to the thief.

Part E:- Personal Liability coverage:-This part of the homeowners policy pays for bodily injury or property damageof someone else for which the insured is legally responsible.

Part F:- Coverage for medical payments to others:-Covers medical payments of others(not the insured) who are injured because ofthe insureds premises, activities or pets.


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E May 2011

Other personal insurance policy:-

Umbrella Policy:- An Umbrella policy is a liability insurance

policy that takes over where basic liability is insurancepolicies leave off.

SIR Self Insured Retention, is a kind of deductible in anumbrella policy. When a liability claim is covered by anumbrella, but not by another policy that covers liability, theinsurer with the umbrella subtracts the SIR before paying theclaim.

Personal Articles floater policy:- Is usually available as ascheduled endorsement to homeowners policies, providesbroad coverage for specified items such as jewellery, furs,silverware and guns.

National Flood Insurance Policy:-


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F May 2011

Do you know?? What is difference between Coverage's for medical payments toothers(homeowners policy) and medical payments coverage(PAP).

The auto policy covers injuries to an insured, as well as others occupying the insureds

auto- but the home coverage does not cover the medical expense of an insured, butonly those of other people who are injured because of the insured.


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Rental reimbursement coverage: - Pays the cost of renting a substitute car if theinsureds car is disabled in an accident

Towing and labor coverage:- Pays for road service and towing.Tapes or CD coverage:- Covers stereo tapes or compact discs in the car.

All Risks, Specified perils, Burden of proof:-

Burden of proof:- The challenge of proving a loss is covered or not covered. It is very

important in cases in which a loss is obvious but its cause is not obvious.

All risks property policy:- Covers any loss unless it is caused by an excluded perildescribed in the policy. Also known as Special or Open perils policy. In this type,the burden of proof is on the insurer.

Specified perils property policy:- Covers any loss that is caused by one or more of the

covered perils that is named in the policy. In this type, the burden of proof is on theinsured.


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H May 2011

Insurance

Commercial Insurance

Bailee Insurance

Types of Commercial Insurance policies:-

Boiler and machinery insurance

Account receivable insurance

Business Income insurance

Building & Contents insurance

Reporting Policy

General Liability insurance

Business Auto Policy

Workers Compensation

Employee dishonesty insurance

COMMERCIAL INSURANCE


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COMMERCIAL INSURANCE:

Personal Property - Except Land and Building & other structures (ex: Store room,Furniture and fixtures)

Real Property - Land and Buildings

Accounts receivable insurance: Pays for the cost of reconstructing accounts receivablerecords that have been damaged or destroyed by a covered peril. It covers anypayments that cannot be collected because records cannot be reconstructed.

Business Auto Policy:- Covers liability from accidents involving the insuredscommercial vehicle. It doesnt provide coverage for accident involving employees whomight use the insureds vehicle and for rented vehicles.

Auto Physical damage/Auto Liability coverage:- An auto insurance coveringdisappearance/damage/destruction of the auto and the bodily injury and property

damage of others for the which the insured is legally responsible.


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P May 2011

Business Income Insurance: Indemnifies a business for its loss in profits caused bythe interruption and also pays the business expenses that continue during theinterruption.

Boilers and machinery Insurance:- Covers explosions of boilers and other pressurevessels as well as breakdown of various types of machinery.

Bailee Customers Insurance:- Covers losses to customers property in the custody ofthe bailee. (Ex: Dry cleaners, warehouse)

Reporting Policy:- A reporting policy can be ideal for a business with propertyvalues that fluctuate a lot during the year because a business with a reporting policypays for only the amount of insurance it actually needs.

A provisional premium is collected at the beginning of the year and the final

premium is computed based on the average of the monthly values reported.


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Direct Loss:- Almost instantaneous reduction in value of property resultingdirectly from damage to that property.

Ex:-Building and contents insurance covers the direct losses resulting fromdamage to that property.

Indirect Loss:-Loss of earnings or extra expenses taking place over a period ofdays, weeks, or months following a direct loss, increases with the passage of time.

Ex:- Business income insurance covers indirect losses resulting from the damageto the covered property.

Since the passage of time in indirect losses cannot be determined, and recovery ofloss depends on the time element business income insurance and other similar

types of indirect losses are sometimes called as time element insurance.

Direct versus Indirect losses; Time element

Insurance


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Types of Coverage's under General Liability Insurance (Commercial):-

General Liability Insurance: Covers some of the major liability exposures of a businessincluding liability related to the premises, operations in progress, products andcompleted operations.

Completed Operations Liability coverage pays for bodily injury or propertydamage caused by work that the insured has completed.

Premises and operations Liability coverage pays for bodily injury or propertydamage caused due to the conditions and ongoing operations in insureds premises.

Products Liability coverage pays for bodily injury or property damage that takesplace away from the insureds premises and is caused by a product sold by theinsured.


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INSURANCE

RATING SYSTEM

InsuranceRating System:


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U May 2011

InsuranceRating System:

Insurance Rating System is an orderly method for arriving at an appropriatepremium.

Types of Insurance rating system:-

Class Rating: Places similar insured's into categories and applies same rate to allinsured's in the same class.

Homogeneity is used to describe similarity among insured's in the same ratingclass.

Perfect homogeneity is impossible. But workable homogeneity is feasible for many oftype of insurance.

Individual Rating: Every Insured is unique that reflects its own unique characteristics.

Judgement Rating :-Is a type of individual rating used to develop a premium for

exposures for which there is no established premium determining system.Underwriter sets the premium based on his experience.


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Schedule rating:- Is used when UWs are permitted to schedule credits or debits ifthey can identify some characteristics that are not considered in the establishedrating system but that affect the loss potential of a particular insured.

Experience rating:- Is a process by which the insurance premiums of largerbusinesses can be modified to some degree based on their past loss records.

Insurance Rate:- An Insurance rate is the price of insurance for each unit of exposure.The rate is multiplied by the number of exposure units to arrive at a premium.

Exposure Units: Are standard units used in insurance rating.

Loss Costs

i) Historical Loss Costs:- Involves only past losses, indicate the dollar lossesrelating to each exposure unit in the past.

ii) Perspective Loss Costs:- Are based on past losses plus some adjustments,indicate the dollar losses relating to each exposure unit that can be expected inthe future.

E l f I l


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W May 2011

Examples of Insurance rating plans:-

Personal Auto Insurance:-

Is usually class rated(ex- territory, age, young drivers, students, age of the car etc.,)

Homeowners Insurance:-Also class rated based on the following 2 categories:-

Construction type:- Generally frame or brick, since wood frame houses burn morereadily and therefore higher premiums than solid brick houses

Protection Class:- Is a rating of the local fire departments capabilities and theavailability of fire hydrants and other water supply sources, usually on a scale of1 to 10, with 1 being best and 10 having essentially no fire protection.

Commercial Building and contents Insurance:-

Can be both class rated and individual rated.


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X May 2011

Commercial general liability Insurance:-

This is usually class rated. Each classification describes a particular type of business

operation.Some commonly used standard exposure units are:- Payroll, gross sales, area etc.,

Workers compensation:- Is usually class rated. Classification is similar to generalliability insurance. There are nearly 600 classification for workers compensation.

Experience modification:- Is adjusting premium for workers compensation

insurance based on the loss experience of he insured employer.Premium discount:- Is applied to workers compensation policies on largerbusinesses to reflect the fact some of the expenses of selling and servicing workerscompensation insurance do not vary in proportion to the premium.

Inland Marine Insurance:-

Can be both class rated and individual rated.


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Y May 2011

Home office :- A typical insurance companys headquarters.

Branch/Regional office:- A local insurance company office, usually located away

from the home office, providing service to accounts in a limited geographical area.ISO( Insurance Services Offices):- The largest insurance service office in the country,performing a variety of services such as developing statistical classification systemsand collecting statistical classification data on insured claims from a large number ofinsurers, analyze this information and develop loss cost data.

Insurance companies that subscribe to ISOs services may use this loss cost info to

set their insurance rates.

NCCI(National Council on Compensation Insurance:- Is responsible for developingworkers compensation insurance loss cost data in most states.

(ISO is not involved in Workers comp rating plans)

Actuary:- Is a person who uses complex mathematical methods, usually with the aid of

computers, to analyze loss data and other statistics and develop systems fordetermining future premiums.


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Insurance Cycles:-

Insurance cycle is of two phases:-

i) Hard Market:- Insurers become more selective, making it more difficult to get

insurance, even at higher prices

ii)Soft Market:- Insurance prices are lower, and insurance is readily available.

Insurance Regulation:-

Insurance is regulated by the states, which has an insurance department headed

by an insurance commissioner.All insurance members of the National Association of InsuranceCommissioners(NAIC) which coordinates insurance regulation among the states.

Rate Filings:- Are documents submitted to a state insurance department that containthe proposed rates and also, when necessary the statistics on which the rates are

based.


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a May 2011

Mandatory Rates:- The state insurance department develop insurance rates that must beused by all insurers.

Prior Approval Law:- States with this law requires the state insurance departmentsapproval for rate changes before they are put into effect.

File and Use Law:- In States with file and use law, insurance companies are permitted touse new rates as soon as they have been filed with the state insurance department.

(The state insurance dept reserves the right to disapprove rates if it can show that they

violate requirements)

No-Filing Law :- With a no-filing law, also known as open competition, no rate filing isrequired because insurance regulators neither approve nor disapprove insurance rates.

Flex-Rating Law:- Insurers may raise and lower rates within a certain range(band)without specific approval from state regulators.


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b

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Rate Suppression:- Occurs if Government regulators hold insurance rates at a levelbelow their true economic cost.

Assets and Liabilities:-Assets are items of value such as cash, stocks, bonds and buildingsLiabilities are financial obligations, These includes debts that have not been paid aswell as expected bills that are in due.

Surplus is the difference between an insurers admitted assets and its liabilities.

Insurance guaranty funds:- Provides a system to pay the claims of insolvent propertyand liability insurers.

Centralization and Decentralization:-

Centralization is the process of moving activities to a central location

Decentralization is the process of moving activities from a centre to differentlocations.


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c

May 2011

Unbundling:- Happens when insurance claims adjusting, loss control, risk

management, or other services are sold separately rather than being bundledtogether with an insurance policy for which a single insurance premium is charged.

Self Insurance or Retention:-

A business does not transfer its risks to an insurance company or anyone else. Itpays for all losses with its own resources.

Captive Insurance:- Insurance company owned and operated by the corporation itinsures.


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d

May 2011

What does insurance company do with the

premium they collect???

Pay Claims: Pay for the losses that is covered by the policy.

Pay Expenses: To cover the cost used to sell, issue and serviceinsurance policies.

Generate Profits & Contingency allowance: Profits generated by theinvestments made by the insurer.

Contingency allowance is a fund for any unpredictable orextraordinary events that might draw on an insurance companysassets. Insurers generally try to retain a portion of their profits to builda surplus that provides a cushion for contingencies.


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e

May 2011

BENEFITSOF

INSURANCE


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f

May 2011

How does insurance help the society???

Payment of losses:

Indemnify: To restore the party that has had a loss to the same financial position asbefore the loss occurred.

Accident Prevention: By emphasizing on loss control measures.

Investment in the economy: Providing funds to help business to grow and createjobs.

Support for Credit: In order to avail loan on a property banks ask for proof ofinsurance.

Reduction of anxiety: since indemnification is guaranteed by the insurancecompany.


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g

May 2011

Insurance Policy Life cycle

Application sent to

UWs review

Underwriting

Activities

Policy Issuance/

Coverage Starts

Claims Handling/

Claims settling

Policy Renewal

Insurance

PolicyLife cycle

Policy Servicing


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TCS Confidential

THANK YOU

intro to property & casualty insurance - new

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